Lump sum and royalties. What are royalties and lump sum fees in franchising? What is a lump sum fee and how does it differ from a regular royalty?

IN modern world There are many ways to start your own business. One of the simplest is franchising. In simple terms the concept can be interpreted as follows: someone has unique product or technology, a trademark - that is, a certain scheme for earning money. Such a businessman acts as a franchisor, that is, a franchise seller. The purchaser of a franchise is called a franchisee. This person or enterprise, for a fee, receives the rights to use the technology or product. To put it simply, franchising is a rental trademark or a certain technology, business scheme.

The franchisor is remunerated in the form of a lump sum fee and royalties.

Term - lump sum

What is this - a lump sum payment? Anyone who has encountered franchising understands: these words mean a fixed payment that is paid to the franchisor by the buyer of the franchise. But the phrase has many meanings, and such a concept is Russian legislation No. And all relations in this area are regulated by the civil code and articles on commercial concessions.

A lump sum premium appears in the lexicon of insurers and means an amount that will never be paid upon the occurrence of an insured event.

What is a lump sum franchise fee? This is a fixed amount that is paid by the franchisee when concluding a concession agreement with the franchisor.

Concession agreement

In legislation, a concession agreement means that the franchisor, the owner of a trademark or a certain method of doing business, transfers to the franchisee, the buyer of this technology, the right to use it for a fee, which is called a royalty. In fact, there is a lease of an object of intellectual property or an invention, a utility model - that is, something unique.

A commercial concession agreement can be easily compared with a license agreement. Only the first version of the transaction describes in great detail the conditions for using the object of the agreement, how it will be carried out entrepreneurial activity franchisee, so that the franchisor’s reputation does not suffer as a result of the latter’s actions.

Peculiarities

Due to the variety of forms of intellectual property, the contract provides for many nuances:

• restriction of territorial action, and therefore the place of business;
• urgent or indefinite;
• franchisees may be subject to requirements that limit their ability to compete with the franchisor;
• limiting the scope of franchise use;
• Franchisees may be prohibited from using similar franchises acquired from other persons.

In addition, a commercial concession agreement may provide for various methods of calculating and making royalty payments, for example:

• fixed payments;
• monthly;
• disposable;
• percentage of revenue;
• markup on goods, which will be paid to the franchisor.

Registration of the agreement

The most interesting thing is that this type of transaction is subject to state registration. If the franchisor is a foreign person, then this operation is carried out by the body that registers such enterprises or individual entrepreneurs on the territory of our country.

In cases where the subject of the contract is an object that is protected by patent law, the contract in mandatory must be registered by the body involved in regulating relations in the field of patent law.

Partial registration of the agreement may be carried out. This means that if a document contains a requirement for non-disclosure of know-how, then this part of the contract is subject to registration.

If the requirements of these rules are not met, the contract is considered void, that is, having no legal force.

Royalty and lump sum

The most sensitive issue when concluding a concession agreement is payments, which are of two types:

• lump sum fee;
• royalty

What is this - a lump sum payment? This is the franchise price, the amount of which is determined by the contract and is paid only once. In fact, the payment is a payment for the acquisition of a certain technology or trademark, a kind of entrance fee.

Royalties are regular payments. For example, for branding a catering outlet, a franchisee can pay monthly or quarterly 5% of the turnover of the entire establishment.

In this case, royalties are not only payments, but also additional protection for the franchise buyer. The franchisor is directly interested in the profitability of the establishment, because the amount of monthly cash transfers received depends on this.

Accounting entries

It is very important for both parties to the contract to understand how to correctly display expenses and income in accounting, including the lump sum. Postings and the rules for displaying them are specified in the provisions of PBU 14/2007.

If for the franchisor the sale of a franchise is the main activity, then all payments to the franchisee are shown as part of sales income. When this activity is not the main activity, the initial contribution is reflected in operating income.

The franchisor displays the lump sum payment received in entries 51/62, 76. Royalties - in entries 60, 76/51. If the down payment is taken into account in deferred expenses, it is displayed on account 97 and distributed in equal parts over the entire term of the contract.

Further relations between the franchisee and the franchisor are taken into account according to the standard “supplier-buyer” scheme.

Fixing payments in the contract

Almost any type of business transaction requires a correct description of the terms of payment. There must also be certain financial and other conditions that will apply in the event of failure to comply with the requirements of the contract. What is it? Lump sum and royalties, size and terms of payment, possible consequences if the terms of the contract are violated by any party, all this must be clearly stated. As a rule, payment of a lump sum fee is a condition for the franchisee to start operating. If he violates the agreement, then he does not have the right to carry out entrepreneurial activities under a commercial concession agreement.

Conditions for termination of the transaction and return of the original payment

Deciding to purchase a franchise is quite difficult. Despite the assurances heard from commercials and posters, this pleasure is not cheap.

What is it? The lump sum fee must be paid immediately upon conclusion of the contract. Royalties must be paid monthly; in addition, it is necessary to rent premises, purchase all related products and hire staff. Or it may happen that after a few months there will be no profit, or the franchisor is not too interested in the success of the franchisee. Therefore, it is very important to provide for the conditions for its termination at the stage of choosing a franchise and signing an agreement.

What conditions must be provided:

• termination due to expiration of the contract;
• failure to comply with the terms of one of the parties;
• at the initiative of one of the parties;
• if the brand that is being franchised is not registered in accordance with the procedure established by federal legislation;
• the basis for termination may be a court decision;
• financial insolvency of the franchisee or franchisor.

In order not to be left behind, it is necessary to stipulate in the contract what the lump-sum contribution to the franchise is and what it will cover. For example:

• number of objects to open;
• what equipment will be supplied by the franchisor and in what time frame;
• conditions for renting the premises, who will pay for it (possibly in equal parts or only the franchisee);
• how the acquired technologies will be used;
• at what stage and to what extent the franchisor provides assistance in “promoting” the outlet.

In fact, the agreement should cover all the intricacies of joint business activities.

Under no circumstances should there be verbal agreements. In a situation where there is no profit, it will not be possible to prove that the franchisor did not fulfill the oral agreements. Do not forget that the transaction must be registered. Otherwise, there can be no talk of any protection of franchisees and work in the legal field. It is very easy to cancel a transaction without registration, therefore, it is also easy to lose your investments. I would like to note that franchising and a lump sum fee for some unscrupulous franchise sellers is all they offer. In fact, purchasing a franchise involves a wide range of responsibilities for the franchisor, who must actually assist in the development of the buyer’s business.

How to return the down payment?

You should be careful when the agreement is concluded on terms of a fixed royalty amount. As a rule, in such cases, the initial payment is quite high, and in the future the franchisor is not at all interested in the buyer of the brand. Therefore, the most difficult question to answer is how to return the lump sum payment when concluding such transactions. Most often, this happens with already promoted brands that earn more from lump sum fees than from royalties.

Franchisees are advised to be careful and negotiate the conditions for the return of the lump-sum fee at the stage of concluding the transaction. A condition for return may be a gross violation of its obligations by the franchisor. For example:

• the franchisor does not have rights to the trademark being sold;
• the seller does not deliver equipment within the agreed time frame or does not transfer business technology;
• does not provide consulting services stipulated in the contract, etc.

If the contract does not provide for the conditions for the return of the lump sum contribution, then this issue can be resolved in court.

Contract without down payment

Sometimes you can find offers - a franchise without a lump sum fee. Is this possible? In fact, it is possible, but this does not mean that the franchisee will not have any cost part when starting a business. All expenses for rent, correspondence, telephone conversations and hiring staff fall on the shoulders of the franchise buyer. Most likely, you will have to purchase from the franchisor finished products or equipment. That is, an agreement option without a lump sum fee is possible, but this does not mean at all that no investments will be required or that starting a business will be cheaper.

Conclusion

Lump sum payment - what is it in simple words? This is the acquisition of a certain business technology and/or trademark. But no precautions specified in the contract provide a complete guarantee that the business will go ahead, because entrepreneurial activity is, first of all, a risk that can be fully justified or lead to the loss of all invested funds.

Before you understand what royalties in a franchise are, you need to understand the basic term in a little more detail. In particular, a franchise should be understood as this kind economic relations between two players in the market, when one party (the franchisor) transfers the right to use its business model to the other party (the franchisee).

At the same time, this kind of cooperation is more correlated with a small form of entrepreneurship, since the client receives finished product, simplifying entry into the relevant market segment. The capital available to the franchisee is invested in successful business, due to a well-promoted brand, established reputation, etc.

To conclude a franchise transaction, it is necessary to sign an agreement, which stipulates such an important point as payment terms. The significance of this point is due to the fact that the type of activity in question provides for a certain variability in forms of payment. So we come to the question of what royalties and lump sum fees are.

The term "royalty" is of French origin and can be translated as "the king's share." At its core, royalties are a method of compensation in relation to the copyright holder, that is, the franchisor.

In this case, it is customary to distinguish three forms of payment.

1. A percentage of turnover where the franchisee pays a certain rate applied to sales volume. This is the most common form of payment, charging a percentage specified in the contract for a given period of time.
2. Percentage of volume products sold in its cost terms minus expenses included in the cost price). To a greater extent, such payment is considered appropriate if there is a trading company markups of different levels.
3. Fixed payment – ​​an amount paid on a regular basis, which is established due to the fact that it is impossible to determine the exact amount of income taken into account when calculating this payment.

Let’s try to somewhat narrow the concept of “royalty” and figure out what the franchisor is paying for. And in the first place in the list of characteristics of the purchased service, this is how a franchise can be defined, we put the transfer of rights to use the brand. The franchisor assigns its product or service subject to certain rules.

In return, the franchisee is provided with support in terms of building own business without the cost of brand promotion, since he receives the finished product. In particular, connections with contractors and suppliers are provided, which eliminates the need to search for them; Recruitment assistance is also offered; design design is provided, etc. In general, there are two types of franchise payment. We looked at one - royalty, and what a lump sum fee is will be discussed below.

Lump sum payment

The main difference between a lump sum fee and a royalty is that it refers to one-time payments. Typically, the franchisee pays this fee immediately and in full, but in some cases it is possible to conclude a franchise agreement where the payment amount is divided into several parts, which are paid according to a specific schedule.

In any case, a lump sum payment is those expenses that allow you to join a franchise network on the condition of a one-time expenditure of funds. As for the size of the payment, it is related to the costs associated with creating a franchising system under conditions of maximum efficiency.

How is the lump sum payment formed?

There is no clearly formulated system for calculating such contributions. Any company has the right to use a calculation method that allows it to formulate a contribution amount that would suit the franchisor from the point of view of economic benefit.

Typically, the lump-sum contribution is correlated with the costs associated with registering an enterprise under a franchise, and also takes into account the costs of putting it into operation. For example, an expense item may include rental of premises, development marketing strategy, employee training, etc. Everything is strictly individual, so it is somewhat difficult to list the types of possible expenses.

Payment for intellectual property used for commercial purposes is fixed in the contract, and the lump-sum payment, as well as royalties, are the main payments for the franchise.

Royalty is one of the main definitions in franchising.

At the beginning of the 16th century in Europe, taxes from subjects and coal miners in favor of Britain began to be called royalties. But in the 21st century, the term has somewhat expanded its meaning.

What is royalty?

Royalties, or regular interest payments– this is a payment to the franchisor for his services on a fixed basis in installments; franchisee pays for the provided franchisor services, technologies, trademark etc. in the form of a fixed interest rate.

Royalty can also mean:

1. Duty.
2. Rent.
3. Tax.
4. Payment for the license.
5. The profit that the owner of the property will receive by transferring it to another private entity for management.

There are several structural types of royalties:

• margin payment(margin – the difference between indicators); designed for the production of goods of different costs and strict control over sales;
• payment from turnover- is provided to the franchisor as a percentage of wholesale or retail sales for a specific period;
• fixed payment– multiple constant payments for equal periods stipulated by the contract;
• copyright royalty– payments to the owner of copyrights to a trademark, patents, land, works of art belonging to another person for each time the above is distributed or used.

Concept of lump sum and royalty

A lump sum payment is somewhat different from a royalty, although it is used in the same area.

If royalties are regular payments, then a lump sum payment is one one-time payment . It is determined by the cost of using a franchise network by a trademark, enterprise, or services.

The amount of the lump-sum contribution is calculated by the total cost of creation effective system for the functioning of franchising, declared value, payment for partner services.

In some cases, the lump sum fee is just the cost of purchasing or registering franchises.

A one-time payment will include costs for:

1. Registration of a franchised enterprise and start of its work;
2. Rent of premises, office, warehouse;
3. Payment of hired personnel;
4. Development of an advertising campaign.

Each enterprise has its own individual economic calculation system.

Royalty rate

Royalty rate– these are fixed and regular payments, that is, a certain percentage of the transaction. The rate is determined by agreement between the parties.

Worth noting: the value of the royalty rate is indicated in the business plan for some time (the immediate period or long-term action) indicating forecasts for the stability of work and its development. This forecast makes it possible to predetermine the percentages of current payments and in the future achieve the desired stable result.

Royalty amount - what is it and what does it depend on?

The amount of payments may depend on the following factors:

• number of enterprises;
• area of ​​buildings;
• actual number of clients;
• name of the enterprise, structure; description of their operating principle; scope of application; characteristics; cost of a term license;
• mention of patents, indication of their data;
• intended countries where the license is being sold;
• state of the license (assigned, being developed, there are only calculations);
• volume of use over the years of licensing;
• cost of the license agreement;
• the volume of documentation that describes the technology of operation of the service or product;
• non-exclusive or exclusive rights of the licensee;
• other conditions provided for in the royalty agreement.

The royalty rate is typical for a large and well-established business, where it is difficult to constantly monitor the accuracy of the franchisor’s income.

Royalty waiver method

The method of exemption from royalties is based on the fact that the property in question is not the property of the real owner, but belongs to another legal entity. That is, the property is presented on behalf of the latter, but with a license and condition specific type royalty

The real owner is not directly related to the property, the right to use it during the period stipulated by the contract with the franchisor, but receives royalties for it.

What are the advantages of a franchise?

A franchise can make a business successful without having absolutely anything to do with it. Company or any other legal entity purchases the rights to use a well-known trademark and manufacture products in accordance with the requirements of the actual owner.

For both the franchisor and the franchisee, the advantages are sufficient to consider active development:

• spreading the brand around the world– increasing the level of recognition and interest among consumers;
• promotion already ready-made business without threat for its existence if the franchise fails; franchisees do not need to start from scratch, a competent business plan is enough;
• the franchisee acquires the necessary skills, abilities, and qualities to conduct business in a specific area. The franchisor provides training for franchisees in accordance with the agreement;
• franchisor(the one who grants the rights to use) receives a favorable financial offer for a long period, profitable raising your business to a new level.

How much do they pay for a franchise?

The advantages of the franchise are certainly enough to make it difficult to become interested in it. But there are also disadvantages. One of the most significant - high cost. But if we take into account the size of the profit from it, then this disadvantage can be leveled out in a short period of time.

When registering a franchise, the franchisee is required to pay a lump sum fee as a guarantee of the right to use. The franchise also provides for monthly payments to the franchisor - a percentage of turnover (analogous to rent).

Buying a franchise is an investment in a business that is beneficial for both parties. The cost is provided by the franchisor, taking into account all services and rights provided and is regulated by the level of development of the business in question.

Taxation of royalties

Russian legislation provides for royalties as passive income both legal entities and individuals. When royalties are received by an individual (resident), the income is retained by the legal entity that pays the royalty interest. That is, royalties individual is not taxed because it is not included in the income from which the single tax is paid.

Worth noting: If royalties are considered not as income, but as an expense, then the situation is somewhat different. In this case, the royalty must be economically justified and not exceed 4 percent of the total income from the sale of the business.

Who else pays royalties?

Royalties are paid by any entrepreneur who uses copyright or licensing rights to their author or owner, according to the agreement. The contract is drawn up personally by representatives of the owner and consumer or between the consumer and an organization that legally represents the interests of the author or owner.

Franchises without royalties and lump-sum fees

There is virtually no business without investment, and not a single area provides such a method of brand promotion.

Sometimes you can consider franchises without investments in the following options:

1. Income for the franchisor in the regional market. The franchisor helps franchisees by opening points of sale of their property in financially. A new entrepreneur must gain a place in such a market. By purchasing rights (or goods) from the owner, the franchisee sells it at a premium, thus ensuring a constant income.
2. Franchise for an employee. Large companies trains staff and the highest results earn the right to purchase a franchise. The owner does not receive the costs of transferring the franchise immediately, but through periodic percentage payments from the income of the new franchisee.
3. The franchisor can grant the rights to use the brand to new persons in the event that the brand, trademark, name has not been promoted until this time and has a weak hold on the market. The purpose of such franchises is to attract partners and promote business.

An individual or legal entity can receive not only active profit from a licensed or copyrighted property, but also passive profit, as royalties, by selling franchises.

Stanislav Matveev

Author of the bestselling book "Phenomenal Memory". Record holder of the Book of Records of Russia. Creator of the training center "Remember Everything". Owner of Internet portals in legal, business and fishing topics. Former owner of a franchise and online store.

Burning with the desire to open my own business under the name famous brand, young entrepreneurs are beginning to learn the basics of franchising. And then they are faced with such concepts as royalties and lump sum.

While the lump sum fee is still more or less clear, the variety of ways to collect royalties often leads to confusion. So what are royalties? How does this payment differ from a lump sum payment? How do franchisors calculate the royalty amount? Why choose one or another calculation scheme?

What is royalty?

The Russian language borrowed the word royalty from English-speaking countries. In turn, in modern English word royalty comes from the Middle Ages. From medieval French, roialte can be translated as “royal, royal, state.” Then this word was used as a legal term. Today, the term “royalty” is used in franchising, copyright and a number of other industries.

In the most general sense, royalties are compensation for the right to use the subject of a license agreement

But what are royalties in a franchise? These are regular payments that the franchise buyer makes to the copyright holder for the use of the trademark, logo and other brand attributes that distinguish it from its competitors. For example, he pays a monthly royalty to the company for using the corporate red color, the slogan “I"m lovin" it" and other brand attributes.

Many people are puzzled by the question of how a royalty differs from a lump sum fee. It would seem that both the royalty and the lump sum payment - payments for a trademark and franchise technologies. In fact, franchisees pay a one-time lump-sum fee for the right to join a network with a well-known name.

But if the franchisee pays a lump sum fee for a trademark, then why pay royalties for the same thing again and again? The answer is simple: in the vast majority of cases, the money received from royalty payments is spent by the franchisor on developing the brand, its marketing promotion and sometimes the development of new products. Depending on the magnitude of these costs, as well as other factors, the size of payments and royalty collection schemes vary greatly.

Types of royalties

Each franchisor sets the amount of royalty payments independently, as well as the payment scheme. At the same time, franchise authors have favorite techniques that are used in most cases, regardless of the type of business. The most commonly used types are: royalty payments:

• payment in the form of a certain percentage of sales volume
• payment in the form of a percentage of turnover or revenue
• fixed payment amount

In practice, these templates are modified by franchisors to make the franchise both effective and attractive to franchisees. The schemes depend on the industry in which the franchise operates.

Product franchises most often waive royalties altogether. The fact is that for product franchises it is more profitable for the franchisee to purchase more branded goods from them and sell them through their outlet. That's why most people work without royalties , or . Often, royalty payments are included in the purchase price of goods in the form of a markup.

Sometimes franchises that provide services also operate without royalties. In this case, royalties are replaced by purchases consumables, as, for example, in the network providing thermal insulation services for premises. Head of Department wholesale sales Olga Isachenko explains:

“We decided to refuse royalties. Instead, franchisees are provided with a minimum volume of material purchases that they can use directly in their work. The monthly purchase amount is about 180,000 rubles. Every six months we check the purchasing schedule with our franchisees. If the conditions for it are not met, we, as a rule, do not renew the contract.”

Regardless of the franchise area of ​​operation, one of the most popular types royalties remain charging a percentage of the volume revenue received. 5% of revenue - this is the royalty rate in the company « » . Its head Alexey Frolov says:

At the same time, Techprint, like many other franchisors, give their franchisees time to to "get back on your feet". Starting your own business and paying a lump sum fee require fairly large cash injections. At first, any enterprise operates at a loss; it needs a certain time to break even. This is why many franchises provide for a deferral of royalty payments for several months. The period for which payments are deferred is set at the discretion of the franchisor.

In addition to deferring payments to reduce the initial financial burden on franchisees, some companies transfer part of the lump sum payment to royalties. This is what a credit brokerage franchise does.

For life cycle franchisees change and the royalty amounts they pay change. By paying a reduced lump-sum fee, the franchise buyer initially pays 50% of his revenue as a royalty. When the part of the lump sum included in these payments is paid, the royalty conditions change: the payment is already 10% of the commission received by the broker.

Even when using a percentage fee structure, some franchisors provide a minimum fixed royalty amount.

This rule applies in the same way. If 10% of the franchisee’s commission turns out to be less than $500, he will still have to pay this amount. The minimum amount is set depending on the size of the lump sum payment. For those who paid 600,000 rubles instead of 1,300,000 rubles to join the franchise, the minimum royalty payment is 1,000 USD.

Many franchises on payments fixed amounts are building their entire royalty system. This way the payment system becomes transparent for both the franchisee and the franchisor. Fixed royalty amounts are used by the franchise « » . General manager company Sofya Timofeeva explains:

“The established royalty amount allows franchisees to live a calm and planned life, and honestly show us their income. By analyzing income reports, we provide franchisees with advice on how to improve operations.”

Moreover, even by setting a fixed royalty amount, the franchisor can reduce the initial financial burden on the business of its franchisees. For this the company gradually increases size fixed payments. At first, a newly minted manager needs to understand the business itself and rebuild business processes, which is why companies do not set large royalty amounts right away. Over time, the franchisee establishes the operation of his business, income from it grows, and with it the amount of royalties grows.

Most often, the fixed royalty amount is calculated in rubles, but franchisors can choose your own currency, in which the franchisee will pay them. International franchise networks may choose US dollars as their payment currency. For example, a royalty of $300 was set by a franchise whose roots go back to Korea. The general director of the company in Russia, Maria Veselova, says:

“The amount and currency of royalties is determined international rules, according to which we work"